Will Treasury bonds keep triple A rating?

By Kurt Brouwer

Investors in U.S. Treasury bonds and other U.S. government securities have seldom questioned the top credit rating our government-guaranteed securities have had since 1949. The triple A rating is safe for now, but that top rating is at risk.

Our acknowledged debt is soaring along with unfunded liabilities such as Medicare. Now, we find out that Social Security is actually paying out more than it is taking in and it must cash in some of the $2.5 trillion in Treasury securities held in that infamous ‘lockbox’ in West Virginia.

When it rains, it pours. That is, if you avoid problems, they seldom get better and they usually get worse, at the worst possible time. Here is the New York Times on the viability of our triple A credit rating [emphasis added]:

Major Western economies have moved “substantially” closer to losing their top-notch credit ratings, with the United States and Britain under the most pressure, Moody’s Investors Service said Monday in a reminder that the global debt crisis is not limited to the small or weak.

The ratings of the Aaa governments — which also include Germany, France, Spain and the Nordic countries — are currently “stable,” Moody’s analysts wrote in the report. But, it added, “their ‘distance-to-downgrade’ has in all cases substantially diminished.”

“Growth alone will not resolve an increasingly complicated debt equation,” Moody’s said. “Preserving debt affordability” — the ratio of interest payments to government revenue — “at levels consistent with Aaa ratings will invariably require fiscal adjustments of a magnitude that, in some cases, will test social cohesion.”

That difficulty has been well-illustrated recently in Greece and Portugal, with strikes and protests as citizens hit the streets to oppose tough austerity measures that directly reduce entitlements and state benefits.

…“The U.K. and the U.S. are more tested than, say, Germany or France,” Mr. [Pierre] Cailleteau said in an e-mailed response to a question. “Their rating relies, more than in other countries, on their ability to repair the damage caused by the crisis on public finances.”

…For now, the U.S. debt remains affordable, Moody’s said, as the ratio of interest payments to revenue fell to 8.7 percent in the current year, after peaking at 10 percent two years ago. If that trend were to reverse, the Moody’s analysts said, “there would at some point be downward pressure on the Aaa rating of the federal government.”…

As we saw recently, Pimco’s Bill Gross has been recommending German bonds for a while now. For more on this, see Pimco’s Ring of Fire.

About Fundmastery Blog

Kurt Brouwer is a fee-only financial advisor with three decades of experience. He is the chairman and co-founder of Brouwer & Janachowski, LLC. Kurt has written books, articles and hundreds of blog posts on mutual funds, ETFs and other investment topics. E-mail: kurt.brouwer *at* gmail.com.